Axalta Coating Systems Ltd. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Axalta makes coatings and reports Performance Coatings and Transportation Coatings segments.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $989.2 million | $1,047.4 million |
| Operating income | $101.8 million | $71.8 million |
| Net income (loss) | $46.7 million | ($3.7 million) |
| Net income attributable to Axalta | $45.1 million; $0.19 diluted EPS | ($4.3 million); ($0.02) diluted EPS |
| Operating cash flow | ($98.7 million) | ($67.2 million) |
| Capital expenditures | $31.5 million | $50.2 million |
| Adjusted EBITDA | $182.0 million | $186.7 million |
- Gross margin on net sales was approximately 34.3%, versus 32.8%; operating margin was approximately 10.3%, versus 6.9%. Adjusted EBITDA margin was approximately 18.4%, versus 17.8%.
- Cash and cash equivalents were $222.9 million at March 31, down from $382.1 million at December 31, 2014. Current assets were $1,750.8 million and current liabilities $798.0 million.
- Total borrowings were $3,608.3 million, compared with $3,696.4 million at year-end; approximate net debt, subtracting cash, was $3,385.4 million. Long-term debt on the balance sheet was $3,566.7 million.
- The revolving facility was undrawn, with $378.7 million available after letters of credit. Management said cash, operating cash flow and available borrowing capacity should meet needs for the next 12 months.
- Comprehensive loss attributable to Axalta was $67.0 million, largely reflecting $109.6 million of foreign-currency translation losses before tax.
Changes versus the prior period
- Sales fell 5.6%; management attributed this chiefly to currency translation, which reduced sales by 10.8%, partly offset by volume growth of 4.8% and a 0.4% contribution from pricing.
- Performance Coatings sales declined 9.6% to $557.2 million and segment Adjusted EBITDA fell 14.0% to $107.1 million. Transportation Coatings sales were nearly flat at $432.0 million, while segment Adjusted EBITDA rose 20.4% to $74.9 million.
- Operating income improved despite lower sales, as cost of sales and SG&A declined. Cost of sales was 65.7% of net sales versus 67.2%; SG&A was 21.5% versus 23.6%.
- Interest expense declined 15.3% to $50.0 million, reflecting lower rates after a leverage-based step-down, debt repayments and currency effects. Adjusted EBITDA nevertheless decreased 2.5%.
Outlook, risks and unusual items
- No numerical earnings or sales guidance was provided. Management cited ongoing “Axalta Way” commercial alignment and cost-reduction initiatives as expected drivers of profitability improvement over the next several years.
- Operating cash flow was negative as working capital absorbed cash, including increased receivables and inventory and lower accrued liabilities. Management attributed these movements to sales timing, inventory needs and payments of operating and employee-related costs.
- Axalta reported a 2.5% effective tax rate, principally due to tax benefits associated with currency losses and earnings in lower-tax jurisdictions; the unusual rate may not be indicative of future periods.
- In March, Axalta acquired an additional 25% interest in an investee, obtained control and recognized a $5.4 million remeasurement gain; preliminary goodwill of $12.5 million was recorded.
- Venezuela’s exchange regime remains uncertain. Axalta used a 12-to-1 rate for its Venezuelan subsidiary while the SIMADI rate was approximately 180-to-1 at quarter-end; a change in the rate used could materially affect the financial statements.
- Debt is substantial and heavily weighted to later maturities: $3,477.1 million of borrowings were scheduled after 2019. The filing identifies foreign exchange, economic and automotive-market conditions, competition, raw-material supply, litigation and environmental matters among relevant risks. Management said pending ordinary-course legal matters were not expected to have a material effect, but noted outcomes of certain claims remain uncertain.
- On April 8, Carlyle sold shares in a secondary offering and private placement at $28 per share; Axalta received no proceeds. The resulting liquidity event fully vested outstanding 2013 Plan options, with $8.0 million of remaining compensation expense expected in Q2 2015.
Important facts for investors to verify
- Whether reported sales and segment trends persist after separating currency effects from underlying volume and pricing.
- Whether working-capital outflows reverse and operating cash flow becomes sufficient to support investment and debt service.
- Debt maturities, interest-rate exposure, covenant headroom and the company’s capacity to reduce leverage.
- The accounting and potential financial impact of Venezuela’s exchange-rate changes, and the expected Q2 expense from accelerated option vesting.